SEC sues hedge fund for recruiting terminally ill in ursing homes to joint option investments for cash

The Securities and Exchange Commission filed a suit alleging that  New York hedge fund manager Donald Lathen and Eden Arc Capital recruited terminally ill patients to join options investments and used their deaths to collect more than $100 million in early redemptions. The SEC asserts that he place their names on joint brokerage accounts to buy bonds and notes  a “death put” option, then exercising the options after the patients’ deaths. The Eden Arc fund profited $9.5 million.

“Lathen deceived issuers by falsely claiming that he and the deceased jointly owned the bonds when the hedge fund was the true owner of the investments,” an SEC spokesman said. “Lathen allegedly put hedge fund client assets at risk by keeping them in accounts in his and the terminally ill individuals’ names rather than following the custody rule.”
According to the SEC, the fund offered the patients cash, usually around $10,000, to use their names on joint accounts. He then opened brokerage accounts on behalf of himself and the patients, buying about 2,350 survivor options investments from dozens of different issuers, the SEC said.

Once the terminally ill patient died, Lathen told the issuers of the investments that as a surviving joint owner on the account he was immediately entitled to redemption, the SEC said. The issuers paid over $100 million in early redemptions to Lathen, which he passed on to the fund, according to the order.

The SEC says the scheme ran afoul of securities laws because the fund concealed that the fund itself, and not Lathen or the recruited patients, was the owner of the assets in all the joint accounts.

Jeffrey Newman represents whistleblowers.